Definition, role in home insurance policy
- Risk insurance is the part of a home insurance policy that covers damage caused by fire, weather and other natural events.
- Floods and earthquakes are the two main exclusions from risk insurance.
- Your lender will let you know the minimum coverage required, but you’ll likely need more.
Home insurance is made up of several components. One is called risk insurance, also known as home cover. Lenders require it in order to protect their investment in your home.
What is risk insurance?
Hazard insurance is the part of your home insurance policy that protects against losses caused by hazards, including fires, storms, hail and other disasters. New home buyers are sometimes confused by the term when their mortgage documents specifically state that they are required to carry risk insurance, often thinking it is some sort of additional coverage outside of their policy home insurance.
“Risk insurance refers to a single section, called Coverage A, of a property insurance policy,” says Brittany Alexander of Premier Property Law. “Coverage A covers damage to the building itself, such as the roof, walls, and windows. Personal property and liability are covered by other sections.”
When damage occurs, if the event that caused the damage is mentioned in your policy, you will be compensated up to the cost of rebuilding your home depending on the amount of coverage you have and the amount of damage that you are undergoing.
Risk insurance is not a legal obligation. But if you have a mortgage, your lender will require it to protect their investment in your home. Also, your lender’s right to ask you to take out risk insurance is protected by law to the point where your lender can take out a policy in your name and charge you for it if they have reason to believe that you don’t. did not meet the requirement. to get coverage.
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What does risk insurance cover?
If your home or other structures on your property are damaged or destroyed, risk insurance comes into play.
“Risk insurance covers the cost of damage to your home from natural or man-made disasters, such as fire, lightning, hail and even vandalism,” says Steve Wilson, head of underwriting at Hippo, the insurance company based in Palo Alto, California. .
“Where general home insurance covers multiple perils, peril insurance specifically covers the structure of your home, such as its walls, floor and roof, and provides financial assistance when replacing or repairing your home,” he said.
Risks are called perils in home insurance policies. Most risk insurance covers damage or loss caused by the following perils:
- fire and smoke including the cost of repairs to your home, loose structures and personal effects
- Wind such as high winds, tornadoes, hurricanes, thunderstorms and microbursts
- Hail including damage to the roof, siding and interior of the home when wind-driven hail enters the structure
- Blast caused by gas leaks, improperly installed gas lines or appliances, nearby explosions that damage your home, and explosions caused by perils not covered such as earthquakes or floods
- Flight including damage to your home or other structures caused by a break-in, stolen or damaged personal effects
- Vandalism and malicious mischief that results in broken windows and lights, defacement of your property, basically anything done without your approval
- falling objectsmost commonly trees, as long as you are not considered negligent and damage occurs to a covered structure or item
- Snow, sleet or ice usually caused by the weight of the material, damage caused by freezing and thawing, or damage caused when snow, sleet, or ice is driven by the wind
- Water (other than flooding) caused by a burst pipe, leaking water heater or other appliance, but not as a result of improper maintenance
- Surges caused by a lightning strike or the operations of a power company
- Civil unrest or riot that results in damage to structures or personal property
What does the risk insurance not cover?
Although hazard insurance covers a wide range of risks, it has limitations, notes Wilson.
“Some natural disasters, such as earthquakes, floods and hurricanes, will not be covered by a standard policy, so if you live in a high-risk area, you may want to consider additional flood insurance. , hurricanes or earthquakes.
Other excluded risks include:
- Mold damage, a fact that makes the discovery of mold during a pre-purchase inspection critical
- Infestations caused by termites, rats or other pests, another item that should be revealed by a good home inspector
- home office including business inventory and supplies must be disclosed and separate coverage must be acquired or it is not covered
- Pets who are considered exotic or rare breed may require special cover, including liability which is not part of normal risk cover
- Jewelry, art or heirlooms and other high-value goods have limited cover at best, which means you must declare them and ensure they are fully covered
- swimming pools generally not covered, although a shed or detached garage is
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How much risk insurance do you need?
The minimum amount of risk insurance you need will be set by your lender, but most experts suggest a more detailed approach than just relying on this figure.
“Each lender has specific requirements for coverage and the amount of coverage a buyer needs to get a mortgage,” Alexander says. “Factors include how much it would cost to rebuild the property in today’s market. Note that the coverage amount may not equal the amount you paid for the home, as part of the purchase price includes the land and the risk insurance only covers the structural building.”
Bill Martin, President and CEO of Plymouth Rock Home Assurance, also stresses the importance of replacement cost.
“The amount of housing coverage you need is determined by the estimated cost to rebuild your home, not its market value,” he says. “You should have enough home coverage to rebuild your home from scratch in the event of a total loss.”
Wilson points out that it’s also important to include personal property coverage in your home insurance policy, as personal effects are not part of the peril insurance. “If you’re not sure what coverage you need, consult your insurance agent to help answer your questions when selecting the best coverage for you,” he advises.
The bottom line
If your lender says you need risk insurance to get the loan, remember that it’s part of your overall home insurance policy, not something more. The minimum required coverage specified by your lender will likely be less than the full replacement cost to build your home from scratch, so a full appraisal is necessary to ensure you don’t have less coverage than you should.
Finally, be aware of special perils such as hurricanes, earthquakes, or floods that may require separate coverage if they are common to the area where your home is located. Your home is probably the most important asset you have. The peace of mind you’ll feel with enough coverage is well worth the cost.